MC Interview | MPC to hold wait-and-watch mode before pivot to easing, says DBS’ Radhika Rao

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Still, several economists have predicted that the central bank could start cutting rates as soon as October as the economic momentum is set to slow amid global headwinds. Rao expects the improved corporate books in India to help build a strong base before the next private investment cycle takes off. Edited excerpts:

Economic activity slumped and inflation rose over the past couple of years and the situation seems to be on the mend now. Is the recent slowdown in inflation here to stay?

After two years of a supply-driven squeeze and more recently, a run-up in commodities, India’s inflation is expected to settle around the 5 percent mark this year, which is within the target but a shade above the midpoint. This trajectory assumes supportive core and non-core price trends, including expectations of a moderation in global growth keeping a lid on commodity prices, which in turn tames input price pressures on firms as well as only a mild impact of unfavourable weather conditions on food segments.

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Have the Monetary Policy Committee and the central bank been able to re-establish their credibility after missing the inflation target last year?

The RBI had held an off-cycle meeting to discuss the committee’s miss of its 2016 inflation-targeting mandate, which was to be outlined in a report to be sent to the central government. CPI inflation had been in breach of the 2-6 percent target range for three successive quarters till September 2022, averaging 6.3 percent, 7.3 percent, and 7 percent in 1Q, 2Q, and 3Q, respectively. A significant part of the slip was on account of exogenous supply-side pressures, including geopolitics, which triggered a sharp rally in commodity prices, including oil, inclement weather, supply chain disruptions, and the pandemic. As these factors subside, inflation is expected to return towards the mid-point of the 2-6 percent target range.

What should the monetary authority do on rates and liquidity?

The MPC is likely to prefer staying in a wait-and-watch mode to gauge the fallout of weather conditions on the price trend before considering a pivot to easing. Supportive recovery prospects also lower the urgency for a quick turn in the policy direction, with a shift likely towards early 2024.

Will private investment revive this fiscal year? Almost all capex is in the public sector, and large companies are happy to let their bottom lines grow.

The public sector is driving capex generation in this part of the cycle, with the private sector likely to focus on demand visibility – domestic and global – before committing to long-gestation investments. There are a few sectors where capex investments are under way, including transport and power. Meanwhile, encouragingly, corporate books are in better shape than the last upcycle, helping to build a strong base before the next cycle takes off.

The fiscal deficit target of 3 percent of GDP is not in sight. How will the fiscal situation evolve in the medium term, given that states' borrowings have also ballooned in recent years?

Apart from pandemic-related spending, the effort was also directed towards improving the quality of the fiscal math by shifting more expenditure onto the books rather than remaining below the line. This has partly contributed to the wider deficit figures. In light of the larger deficits and the path ahead, the authorities have assumed a more measured target of 4.5 percent of GDP for the coming two years, which in itself also receives significant consolidation, which we reckon will be supported by lower revenue spends and greater reliance on tax revenues. Moderation in nominal GDP will also slow the process of course correction.